Owing money to anyone is a significant burden, but having a Canada Revenue Agency (CRA) tax debt piling up against you can truly be a nightmare for any taxpayer. Unlike other creditors who need to get legal permission to take any action against you, the CRA has already been endowed with the power to freeze all your bank accounts, garnish wages from your employer directly, halt any tax refunds, credits, or benefits, and even seize and sell your assets and property to recover its debt. Moreover, the CRA charges compound daily interest on the amount owed, making repayment even more difficult and the threat of accumulating penalties looming large.
Such swift and extreme actions can severely hinder your daily life and finances, as all your streams of income are significantly impacted. And it’s not just the fact that the CRA directly redirects your income to itself till the debt is recovered – halting income also means missing bill payment deadlines, bank overdraft charges, tarnished credit history, and almost no chance of getting another loan.
This not only adversely affects you but also your family. Is there a way out of this seemingly endless hole of CRA debt? There is. Filing for bankruptcy can actually be the solution to your escalating CRA debt problem.
Can Bankruptcy Protect You from CRA Debt?
The word ‘bankruptcy’ isn’t exactly a happy one, but when faced with overwhelming debt, it is a hopeful one.
While filing for bankruptcy also implies financial disaster, it has some advantages. Firstly, bankruptcy frees you from paying off eligible tax debts to your creditors. Filing for bankruptcy under the Bankruptcy and Insolvency Act gives you immediate protection from the CRA’s collection actions stated above. In fact, completing the bankruptcy process might also wipe out any outstanding debt in most situations and protect you from any future recovery actions of the CRA.
It also gives you time to realign and plan for a fresh financial start. However, not all your debt will be cleared. Even with the protection of the bankruptcy law by your side, you will have to repay some eligible debts. So, how exactly does bankruptcy work? Let’s find out.
Understanding Eligibility Criteria for CRA Bankruptcy
Not all debtors can resolve their CRA debt issues by filing for bankruptcy. To be eligible for bankruptcy, your debt must be long-standing, i.e., from a tax year that ended at least 12 months prior to the bankruptcy filing. Any outstanding tax returns must also be completed and filed.
Even after declaring bankruptcy, not all your debts will be eliminated. While you may receive relief from your CRA tax debt, including personal income tax and some penalties, other debts, such as payroll remittances, GST/HST debts, and debts stemming from fraudulent activities or tax evasion, will still have to be repaid by you.
Even in the case of personal income tax debt, any amount above $200,000, which represents more than 75% of your total unsecured debt, will face investigation and a court hearing. It is then up to the court to either grant a conditional discharge, ask you to make a partial repayment, or even refuse a discharge outright.
The bankruptcy law offers an opportunity for honest taxpayers who may have made some bad financial decisions or been unfortunate in their financial ventures to ease their debt burden. However, it in no way supports or aids debt racked up by fraudulent or illegal means.
How CRA Bankruptcy Works
The first step in initiating the bankruptcy process is consulting a Licensed Insolvency Trustee (LIT), a federally licensed expert who can guide you through the bankruptcy process, explain the legal requirements, and assist with fulfilling the necessary formalities. Most importantly, even before beginning the process, LIT analyses and advises you on whether declaring bankruptcy is the best solution for your case, or if there are other options you can explore.
Suppose you decide to go ahead with the bankruptcy route. In that case, you will have to supply your monthly budget and other financial information, give details of your assets and debts, and disclose any changes in your income/expenses during the period for which you are filing bankruptcy. You will also be required to attend compulsory credit counselling sessions as part of the process. And yes, you will also need to file tax returns for the period following bankruptcy. There is a possibility of receiving tax refunds for this period, unless the court suggests otherwise.
What Happens to Your Assets After Declaring CRA Bankruptcy
As mentioned earlier, the CRA has the power to seize and place a lien on your assets to recover its debt. This requires a court order certifying the amount of the debt. If approved, your non-exempt assets, such as any property, luxury items, vehicles over a specific value, valuable collections of art or coins, and inheritances, can be seized and sold to repay your creditors.
However, some things are exempted from such a fate. These include clothing, work-related equipment, essential household items, and certain investments, such as Registered Retirement Savings Plans, Registered Education Savings Plans, and pension property, except for contributions made within the last 12 months preceding the bankruptcy filing.
It should be noted that once the CRA places a lien on your property or assets, you cannot sell them until the debt is cleared.
Problems with Bankruptcy
While bankruptcy can give you some relief when CRA debt becomes overwhelmingly stifling, it isn’t a solution to financial problems as such. From loss of assets to negatively impacting your credit score and hampering your chances of getting another loan in the future, there are many side effects to declaring bankruptcy. It can also affect future employment opportunities as well as eligibility for tax benefits and credits.
Above all, it does not absolve you of the entire CRA debt and the stress that it brings with it. Therefore, exploring alternative options for managing debt before filing for bankruptcy is always a prudent approach.
Alternatives to CRA Bankruptcy
An LIT can advise you on alternatives to manage CRA debt based on your financial situation, some of which are –
- Consumer Proposal
This involves discussing and negotiating with your creditors, including the CRA, about allowing you to make affordable monthly payments via a structured repayment plan under the guidance of LIT. If agreed upon, a Consumer Proposal can significantly reduce your debt in the medium term, while protecting your assets and property from the CRA’s collection actions.
- Tax Relief Programs
The CRA offers several Tax Relief Programs to individuals facing financial and tax problems due to natural disasters, severe illness, and other uncontrollable or unforeseen events. These programs have eligibility criteria and require adequate documentation that details the reasons and evidence of the financial problems.
- Debt Consolidation Loan
The CRA’s interest on tax dues is daily compounding. One option is to consolidate your CRA debt and other high-interest debts, such as credit card loans and personal loans, into a single, long-term loan with a lower interest rate. This way, you can streamline your debt repayment to a single debt and potentially reduce your interest expense.
Contact Glenn Graydon Wright LLP in Oakville to Help You with Tax Planning
Don’t let your tax dues snowball into an unmanageable debt, leaving the above alternatives or bankruptcy as your only option. A professional tax consultant can help you plan your taxes, reduce late-filing penalties, and negotiate tax payment terms with the CRA.
At Glenn Graydon Wright LLP, our accountants and tax experts provide services that include tax planning and strategies designed to minimize tax liability while ensuring compliance with tax laws. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and tax planning expertise, contact us at 905-845-6633 or connect with us online to schedule an initial consultation.